TDS Not Required To Be Deducted At The Time Of Grant Of ESOP: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that TDS is not required to be deducted at the time of grant of an employee stock ownership plan (ESOP).

The bench of Rahul Chaudhary (Judicial Member) and Prashant Maharishi (Accountant Member) has observed that the basic objective of TDS is to ‘pay tax as you earn, and the taxes are not required to be deducted at source at the time of grant of an ESOP, but at the time the option is exercised by employees of the assessee and shares are allotted to the employees, because at that time it is taxable in the hands of employees.

The respondent/assessee deals in business segments like lubricants for automotive and industrial applications, liquefied petroleum gas for domestic and commercial applications, other products, and special fluids.

For AY 2013-14, the assessee was subject to TDS verification, in which it was found that tax was not deducted on the ESOP of Rs. 1.66 crore in the nature of performance shares, which shall become final after a three-year vesting period debited to the P&L account.

The assessing officer was of the view that the amount of taxes required to be deducted should be deducted as soon as the amount is debited in the books of accounts. The claim of the assessee was that it is deducted at the source when the actual ESOP is taxable in the hands of the assessee.

The assessing officer rejected the contention of the assessee and held that since the right to exercise the option was provided in the financial year 2012-13 when it was granted, tax deduction at source would be applicable in that year. The assessee has failed to deduct tax at source on the employees’ share-based payments.

In an appeal before the CIT (A), it was held that the assessee has demonstrated that the tax deduction at source has been deducted at the stage of the employee actually availing of the ESOP options every year.

The assessee contended that the assessee has not granted tax when an ESOP is granted, but as soon as the shares are allotted to the assessee, the same is considered a perquisite in the hands of employees under Section 17 (2) (vi) of the Income Tax Act.

The tribunal held that with respect to the ESOP payment, it would be considered a perquisite of the eligible employees when shares that have been granted and vested in the employees are allotted on exercise of the option on completion of the vesting period. Therefore, at the time of allotment of shares on the exercise, the difference between the fair market value and the value of the shares as of the exercise date and the amount that employees have paid is calculated and taxed accordingly. The difference is subject to tax in the hands of the assessee. This is the provision of taxation of perquisites in the hands of employees under s. 17 (2) (vi) of the Act. Provisions of TDS are enacted with the basic objective of ‘pay [tax] as you earn’. Further, TDS is considered an advance tax paid in the hands of the recipient of income. Therefore, the taxes are not required to be deducted at source at the time of grant of the ESOP, but at the time the option is exercised by employees of the assessee and shares are allotted to the employees, because at that time they are taxable in the hands of employees.

Case Title: DCIT Versus Total Energies Marketing India Pvt. Ltd.

Case No.: ITA Nos. 127 to 133/MUM/2023

Date: 16.08.2023

Counsel For Appellant: Ketan Ved

Counsel For Respondent: Biswanath Das

Click Here To Read The Order